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R RE ES SE EA AR RC CH H C CO OM MM MU UN NI IC CA AT TI IO ON N
A Study of Opportunities and Challenges for Mutual Fund in India : Vision 2020
1
Sarish*
ABSTRACT
In this paper, I have undertaken a study on mutual funds. The mutual fund sectors are one of the fastest growing sectors in Indian Economy and have awesome potential for sustained future growth. Mutual funds make saving and investing simple, accessible, and affordable. The advantages of mutual funds include professional management, diversification, variety, liquidity, affordability, convenience, and ease of recordkeepingas well as strict government regulation and full disclosure. The Mutual Funds originated in UK and thereafter they crossed the border to reach other destinations. The concept of MF was indianized only in the later part of the twentieth century in the year 1964 with its roots embedded into Unit Trust of India (UTI). Since its inception in 1964 there were only 25cr assets under management like a sapling but it has grown into a big banyan tree with assets of Rs. 481749cr under assets management companies till March 2010. But presently it has increases up to 700538cr at the end of March 2011. Now, booming stock markets & innovative marketing strategies of mutual fund companies in India are influencing the retail investors to invest their surplus funds with different schemes of mutual fund companies with or without complete understanding of Mutual Funds (MF). This paper focuses on the analysis of the mutual funds, its benefits, and drawbacks and I have made a detailed summary on its various aspects. Keeping in mind the rise and fall in the money market it is better to invest in mutual funds for those investors who are risk adverse and for those who are risk taker it is better for them to invest in share market. I have discussed about the mutual fund, benefits of investing in mutual fund, its drawbacks and have done detailed study on various aspects of mutual fund. This paper aims at exploring the potential of mutual funds in India with all problems, complexities and variables, and suggesting the means and ways of meeting the challenges for developing the mutual funds in tandem with its potential of economic growth. I have relied on secondary data in order to identify and analyze the challenges and opportunities for mutual funds. Keywords : Mutual Fund, Opportunities, Challenges.
____________________________ 1
Singhania
University,
Jhunjhunu,
Rajasthan,
INDIA.
Sarish / VSRD International Journal of Business & Management Research Vol. 2 (4), 2012
1. INTRODUCTION
The Mutual Funds originated in UK and thereafter they crossed the border to reach other destinations. The concept of MF was indianite only in the later part of the twentieth century in the year 1964 with its roots embedded into Unit Trust of India (UTI). Now, booming stock markets & innovative marketing strategies of mutual fund companies in India are influencing the retail investors to invest their surplus funds with different schemes of mutual fund companies with or without complete understanding of Mutual Funds (MF). Mutual funds also invest in more exotic financial instruments such as futures, options, forwards, and swaps. In addition, some mutual funds invest mainly in shares in some market sector or industry such as financial services, utilities, or technologies. These are referred to as sector or specialty funds. Bond funds come in different types and vary according to risk (for example, investment-grade corporate bonds and high-yield junk bonds), by maturity, as bonds are short- and long-term, and by type of issuing institution, which may be a corporation, a government agency, or a municipality. Bond and stock funds invest mainly in domestic funds, such as US securities, global funds have both, domestic and foreign securities and international funds focus on foreign securities. Investment is the allocation of funds to assets and securities after considering their return and risk factors. Investor plans for long horizon after considering the fundamental factors and assumes moderate risk. The main objectives of rational investors are maximizing returns and minimizing risk, safety of the principal, tradability and liquidity are his subsidiary objectives. Financial instruments can be categorized by form depending on whether they are cash instruments or derivative
instruments: Cash instruments are financial instruments whose value is determined directly by markets. They can be divided into securities, which are readily transferable, and other cash instruments such as loans and deposits, where both borrower and lender have to agree on a transfer. Derivative instruments are financial instruments which derive their value from the value and characteristics of one or more underlying entities such as an asset, index, or interest rate. They can be divided into exchangetraded derivatives and over-the-counter (OTC) derivatives. Alternatively, financial instruments can be categorized by "asset class" depending on whether they are equity based (reflecting ownership of the issuing entity) or debt based (reflecting a loan the investor has made to the issuing entity). If it is debt, it can be further categorized into short term (less than one year) or long term. Foreign Exchange instruments and transactions are neither debt nor equity based and belong in their own category. A legal document such as a contract, will or deed. Basically, any asset purchased by an investor can be
Sarish / VSRD International Journal of Business & Management Research Vol. 2 (4), 2012
considered a financial instrument. Antique furniture, wheat and corporate bonds are all equally considered investing instruments; they can all be bought and sold as things that hold and produce value. Instruments can be debt or equity, representing a share of liability (a future repayment of debt) or ownership. Commonly, policymakers and central banks adjust economic instruments such as interest rates to achieve and maintain desired levels of other economic indicators such as inflation or unemployment rates. Some examples of legal instruments include insurance contracts, debt covenants, purchase agreements or mortgages. These documents lay out the parties involved, triggering events and terms of the contract, communicating the intended purpose and scope. In today's financial marketplace, financial instruments can be classified generally as equity based, representing ownership of the asset, or debt based, representing a loan made by an investor to the owner of the asset. Foreign exchange instruments comprise a third, unique type of instrument. Different subcategories of each instrument type exist, such as preferred share equity and common share equity.
> Investor > Passes Back To > Pool their Money With
Mutual
Fund Working
> Securities
> Invested In
The Flow Chart Below Describes Broadly the Working of a Mutual Fund
Sarish / VSRD International Journal of Business & Management Research Vol. 2 (4), 2012
5. INDUSTRIAL SECURITIES
These are securities issued by the corporate sector to finance their long term and working capital requirements. The Major Instruments that fall under Industrial Securities are : Debentures, Preference Shares And Equity Shares.
6. DEBENTURES
Debentures have a fixed maturity and pay a fixed or a floating rate of interest during their lifetime. The
Sarish / VSRD International Journal of Business & Management Research Vol. 2 (4), 2012
company has an obligation to pay interest and the principal amount on the due dates regardless of its profitability position. The debenture holders are not members of the company and do not have any say in the management of the company. Since these carry a predefined rate of return, there is no scope for any major capital appreciation. However, in case of fixed rate debentures, their market price moves inversely with the direction of interest rates. The debenture issues are rated by the professional credit rating agencies regarding the payment of interest and the repayment of the capital amount. Apart from the `plain vanilla variety of debentures (periodic payment of interest during their currency and repayment of capital on maturity), a number of variations have been devised. For example, zero coupon bonds are issued at a discount to their face value and redeemed at the full face value. The difference constitutes return for the investor.
7. PREFERENCE SHARES
Preference Shares carry a fixed rate of dividends. These carry a preferential right to dividends over the equity shareholders. This means that equity share holders cannot be paid any dividends unless the preference dividend has been paid in full. Similarly on the winding up of the company, the preference share holders get back their capital before the equity share holders. In case of cumulative preference shares, any dividend unpaid in past years accumulates and is paid later when the company has sufficient profits. Now all preference shares in India are `redeemable, i.e. they have a fixed maturity period. Thus, preference shares are sometimes called a `hybrid variety incorporating features of debt as well as equity.
8. EQUITY SHARES
Equity Shares are regarded as high return high risk instruments. These do not carry any fixed rate of return and there is no maturity period. The company may or may not declare dividend on equity shares. Equity shares of major companies are traded on the stock exchanges. The major component of return to equity holders usually consists of market appreciation.
Sarish / VSRD International Journal of Business & Management Research Vol. 2 (4), 2012
Capitalize Database NSE Website BSE Website Mutualfundsindia.com AMFI Module Annual report and financial statements of mutual funds & financial instrument published at various time intervals
Combining the above methods for categorization, the main instruments can be organized into a table as follows: Instrument Type Asset Class Securities Other cash Exchange-traded derivatives OTC derivatives
Interest rate swaps Interest rate caps and Bond futures floors Options on bond futures Interest rate options Exotic instruments Short term interest rate Forward futures agreements Stock Equity futures rate
Bills, e.g. Debt (Short Bills Term) Commercial <=1 year paper Equity Stock
T-
of
options Stock options Exotic instruments Foreign exchange options Outright forwards Foreign exchange swaps Currency swaps
Foreign Exchange
N/A
Spot exchange
foreign
Currency futures
Some instruments defy categorization into the above matrix, for example repurchase agreements.
Amortized costs
Assets
Available for sale Deposit account - Other comprehensive income (impairment recognized financial assets Fair value in net income immediately) Analysis
Sarish / VSRD International Journal of Business & Management Research Vol. 2 (4), 2012
Scheme Name
Top 5 Holdin gs
Top 10 Holdin gs
Top 15 Holdin gs
Scrip with Highest Exposure Bharati Tele Ventures (7.03%) (550000) Larsen & Toubro Limited (6.15%) (131055) Grasim Industries Ltd (7.35%) (685367) Reliance Industries Ltd (6.51%) (875000) Infosys Technologi es Ltd (6.88%) (87315)
No. of Scrip s
Avg. Exposur e
30.01
50.17
65.61
30
492.79
16.43
27.91
45.98
58.17
43
290.62
6.76
31.35
52.23
69.78
29
2575.9 7
88.83
27.74
43.95
57.55
49
1672.8 9
34.14
29.86
51.83
69.49
31
276.63
8.92
Name Key Birla Top 100 Fund - Growth DSP ML Top 100 Equity Fund - Growth Franklin India Blue-chip - Growth HDFC Top 200 - Growth Principal Large Cap Fund - Growth
Sarish / VSRD International Journal of Business & Management Research Vol. 2 (4), 2012
value, represented by the ownership of one unit in the Fund. It is calculated simply by dividing the net asset value of the Fund by the number of units. However, most people refer loosely to the NAV per unit as NAV, ignoring the per unit. We also abide by the same convention.
No investment is risk free. If the entire stock market declines in value, the value of mutual fund shares will go down as well, no matter how balanced the portfolio. Investors encounter fewer risks when they invest in mutual funds than when they buy and sell stocks on their own. However, anyone who invests through a mutual fund runs the risk of losing money.
Sarish / VSRD International Journal of Business & Management Research Vol. 2 (4), 2012
16.2.
All funds charge administrative fees to cover their day-to-day expenses. Some funds also charge sales commissions or "loads" to compensate brokers, financial consultants, or financial planners. Even if you don't use a broker or other financial adviser, you will pay a sales commission if you buy shares in a Load Fund.
16.3.
Taxes
During a typical year, most actively managed mutual funds sell anywhere from 20 to 70 percent of the securities in their portfolios. If your fund makes a profit on its sales, you will pay taxes on the income you receive, even if you reinvest the money you made.
16.4.
Management Risk
When you invest in a mutual fund, you depend on the fund's manager to make the right decisions regarding the fund's portfolio. If the manager does not perform as well as you had hoped, you might not make as much money on your investment as you expected. Of course, if you invest in Index Funds, you forego management risk, because these funds do not employ managers.
17.1.
Diversification
The best mutual funds design their portfolios so individual investments will react differently to the same economic conditions. For example, economic conditions like a rise in interest rates may cause certain securities in a diversified portfolio to decrease in value. Other securities in the portfolio will respond to the same economic conditions by increasing in value. When a portfolio is balanced in this way, the value of the overall portfolio should gradually increase over time, even if some securities lose value.
17.2.
Professional Management
Most mutual funds pay topflight professionals to manage their investments. These managers decide what securities the fund will buy and sell.
17.3.
Regulatory Oversight
Mutual funds are subject to many government regulations that protect investors from fraud.
17.4.
Liquidity
It's easy to get your money out of a mutual fund. Write a check, make a call, and you've got the cash.
Sarish / VSRD International Journal of Business & Management Research Vol. 2 (4), 2012
17.5.
Convenience
You can usually buy mutual fund shares by mail, phone, or over the Internet.
17.6.
Low Cost
Mutual fund expenses are often no more than 1.5 percent of your investment. Expenses for Index Funds are less than that, because index funds are not actively managed. Instead, they automatically buy stock in companies that are listed on a specific index.
18.1.
Growth Drivers
Although several macroeconomic and demographic factors affect the growth of the industry, the key underlying driver for all the categories of funds is the key economic indicator the GDP growth rate.
18.2.
Expected Impact
Sarish / VSRD International Journal of Business & Management Research Vol. 2 (4), 2012
In the event of a quick economic revival and positive reinforcement of growth drivers identified, KPMG in India is of the view that the Indian mutual fund industry may grow at the rate of 22-25 percent in the period from 2010 to 2020, resulting in AUM of INR 16,000 to 20,000 billion in 2020.
19. CONCLUSION
Mutual funds are among the most preferred investment instruments. For middle income individuals, investing in mutual funds yields higher interest and comes with good principal amount at the end of the maturity period of the mutual fund investment. Another important fact is that mutual funds are safe, with close to zero risk, offering an optimized return on earnings and protecting the interest of investors. It is important to gain good understanding of mutual fund investments, companies in the field, and mutual fund experts, as customers are easily misguided by the advertisements and offers promoted by various financial institutions. As a professionally managed type of investment mechanism, the mutual fund works by pooling money from many individuals, investing in a diverse portfolio of securities such as short-term money market instruments, bonds, stocks, and other financial instruments and commodities, for instance, precious metals. The mutual fund is run by a fund manager who is responsible for the buying and selling of investments in accord with the investment objectives of the fund. Funds registered with the Securities and Exchange Commission, should distribute almost all of their net realized gains and net income from the sale of securities and no less than once a year. Most of the funds are organized in the form of trusts and overseen by trustees or boards of directors. These are charged with the management of the fund, as to serve in the best interest of investors.
20. REFERENCES
[1] AMFI [2] Bansal, lalit k.(1996), Mutual Funds Management and Working, Deep & Deep Publication, New Delhi.
[3] Frazzini Andrea, Dumb Money: Mutual Fund flows as the cross-section of stock returns, NCFMs AMFI Material on mutual funds (workbook) [4] Frazzini Andrea, Dumb Money: Mutual Fund flows as the cross-section of stock returns, NCFMs AMFI Material on mutual funds (workbook) [5] Nalini Prabha Tripathy, Market Timing Abilities and Mutual Fund Performance- An Empirical Investigation into Equity Linked Saving Schemes (2006) XIMB Journal of management, Vilakshan, April 2000, pp 6-8 [6] Nalini Prabha Tripathy, Market Timing Abilities and Mutual Fund Performance- An Empirical Investigation into Equity Linked Saving Schemes (2006) XIMB Journal of management, Vilakshan, April 2000, pp 6-8 [7] Panwar Sharad and Madhumathi R Characteristics and Performance of selected mutual funds in India.,(2005) [8] Prasanna Chandra, Investment Analysis and Portfolio Management sixth reprint2007, Tata Mcgraw-Hill Publication company limited, New Delhi. [9] Riter,Jay,R1998, The buying and selling behavior of individual investors at the turn of the year, journal of finance 43, 701-717. [10] Riter,Jay,R1998, The buying and selling behavior of individual investors at the turn of the year, journal of
Sarish / VSRD International Journal of Business & Management Research Vol. 2 (4), 2012
finance 43, 701-717. [11] SEBI [12] The Economic Times [13] Tripathy Nalini Prava Mutual Funds in India. Emerging Issues Vol - 1 ( 2007) ,123-158. [14] Tripathy Nalini Prava Mutual Funds in India. Emerging Issues Vol - 1 ( 2007) ,123-158. [15] Journal of Commerce & Trade Vol-VI (2011), 0973-4503. [16] www.moneycontrol.com [17] www.valueresearchonline.com [18] www.fundsindia.com [19] www.dhanashreeinvestment.com [20] www.appuonline.com [21] www.indiastudychannel.com